چکیده انگلیسی

We study the impact of changes in sovereign ratings and outlooks on international capital markets using a comprehensive database of 34 countries, covering the major regions in the world over the period 1990–2000. We find the rating agencies provide financial markets with new tradable information. Specifically, they affect not only the instrument being rated (bonds) but also stocks. Interestingly, bond markets react differently than stock markets in many respects. We find, only for bond market returns, a positive impact is significant when the economic outlook is upgraded and outlook changes appear to be at least as important as rating changes. In addition, downgraded ratings and economic outlooks occur mainly during bond market downturns, raising a possibility that rating agencies may exacerbate a bond bear market. Only downgrade has a discernible impact on equity and bond returns and the effects of rating announcement are significantly asymmetric. On equity returns, the market responses of downgrade are more pronounced in the cases of high inflation, low fiscal balance, and local currency debt; in contrast, the market responses of downgrade across class are more pronounced in the cases of low current account and foreign currency debt. On bond returns, the market responses of downgrade are more pronounced in the cases of a relatively ailing economy as proxied by emerging market, high inflation, and low current account; on the other hand, the market responses of downgrade across class are more pronounced in the cases of a relatively healthy economy as proxied by low inflation, high liquidity, and during non-crisis period. This study has important implications for investors' international asset allocation and for regulatory agents such as the Basel Committee increasingly depending on credit rating agencies such as Moody's and S&P's in their regulatory deliberations.

مقدمه انگلیسی

Credit ratings have been widely studied in the context of financial market information processing. But the literature has left several issues still outstanding, including the efficiency of international information assimilation. Sovereign credit risk is a particularly important subject in this general area. Frequent debt crises, defaults, and renegotiations point to the importance of assessing sovereign risk. Sovereign ratings are supposed to indicate the likelihood that a debtor central government will fail to fully discharge its obligations, so the accuracy of such ratings are extremely important to investors.
The information used by rating agencies to assess sovereign risk ranges over macroeconomic data, government fiscal policies, balance of payments, and the level and historical experience of the country's external debt. The same information is normally available to the public. Consequently, one could ask: “Does a sovereign credit rating simply mirror the international market's assessment of a country's risk, or does it provide additional insights?” Prior research has not fully answered this question.
Kaminsky and Schmukler (2002) examine whether changes in ratings of one type of security affect other asset. News about one type of security can affect yields of other securities through various channels. They explain a downgrade of sovereign bonds which might have negative impact on stock markets due to the expectation of an increase in tax rate on firms to offset negative budgetary impact of higher interest rate caused by a downgrade.1 The present paper extends this study by investigating the reactions of global bond and stock markets to sovereign credit rating changes and also the difference of such reactions under macroeconomics and rating characteristics (hereafter, country characteristics).
Unlike previous research, this study also examines announced changes in the economic outlook provided by rating agencies. Rating agencies typically issue periodic outlook, often termed a “watchlist” containing implicit information about prospective short term changes in ratings. Outlooks forecast the likely direction of an issuer's credit quality over the medium term, typically over a 12- to 18-month horizon. Outlooks are modified when a change in an issuer's risk profile has been observed but it is not yet regarded as permanent enough to warrant a new credit rating. Kaminsky and Schmukler (2002) find a large proportion of changes in outlook are followed by changes in rating.2 This implies the rating changes are not often complete surprises and the accompanying movements in prices do not fully reflect the valuation impact of the rating. Using a daily data set consisting of all publicly traded U.S. dollar denominated sovereign debt, we investigate several related issues. We tabulate the size of price reactions in both the bond and stock markets to changes in the sovereign credit rating and in the economic outlook. We study whether the market's reaction to a change in economic outlook differs from its reaction to a change in the sovereign credit rating. We look for asymmetries; i.e., do negative announcements have a quantitatively different impact than positive announcements? Do the rating agencies tend to downgrade when the market is falling and/or upgrade when the market is rallying? Do changes in sovereign debt ratings and outlook contribute to market instability? Are there differences in market reactions to rating changes across and within classes (e.g., from B to A (across) and AA to AA+ (within))? In contrast to other literature in this field, we investigate the impact of historical country characteristics including macroeconomics factors, such as inflation, current account, and fiscal balance and rating factors, such as currency of debt and change in outlook or rating on market reactions to sovereign credit rating changes. Does a downgrade (upgrade) have a negative (positive) impact on bond and stock returns of emerging countries more than developed countries or high inflation countries more than low inflation countries? Thus far, the impact of sovereign credit rating changes under selected country characteristics on bond and stock returns has not been studied. We believe this is an important parameter to understand the information content of sovereign credit rating and, therefore, this issue is the main focus of our study.
Our study differs from the existing sovereign credit rating literature in several ways: We consider a larger set of 34 countries, which includes both developed and emerging markets, our sample extends 11 years from 1990 to 2000, we examine the financial market impact of imminent rating changes, such as outlooks and the Credit Watch list, as well as implemented rating changes and, we estimate the impact of changes in ratings of one type of security on other assets.3 This cross-asset effects can be large and through various channels, heightening financial instability. We also investigate which country characteristics affect market reactions to changes in credit rating announcements. Finally, we study the impact of the interactions between rating change and selected country characteristics on bond and stock returns. To date little is known about the interaction between the information contained in rating changes and country characteristics and its impact on market prices. There is no reason to expect country characteristics affecting international bond markets are the same ones affecting equity markets and two different countries will have the same market reactions to sovereign credit rating changes. Therefore, this study should be of interest to international investors and sovereign governments who wish to forecast changes in both the bond market and the equity market.
We find rating agencies provide capital markets with new tradable information unavailable in the public domain; a negative and significant market reaction in the bonds and equity markets is associated with rating and outlook downgrade, while a positive and significant market reaction is associated with upgraded outlook in the bond market only. Second, a downgraded ratings and economic outlooks occur mainly during bond market downturns, raising a possibility that rating agencies may exacerbate a bond bear market. Third, in cross-sectional analysis, only a downgrade rating events have discernable negative impacts on the bond and stock returns. Fourth, such a significant and negative impact of downgrade on stock returns is more pronounced in the cases of high inflation, low fiscal balance, and local sovereign debt; in contrast, downgrade across classes has more negative impact in the cases of low current account and foreign currency debt. Fifth, downgrade has more negative impact on bond returns in the cases of a relatively ailing economy as proxied by emerging country, high inflation, and low current account; whereas, downgrade across class has more negative impact in the cases of a relatively healthy economy as proxied by low inflation, high liquidity, and during non-crisis period. This study has important implications for investors' international asset allocation and for regulatory agents like the Basel Committee increasingly depending on credit rating agencies such as Moody's and S&P's in their regulatory deliberations.

نتیجه گیری انگلیسی

This study addresses the questions, “Does a change in sovereign rating simply mirror the existing international market's assessment of country's risk?” and “Does a change in sovereign credit rating provide financial markets with new information?” We try to answer these questions by investigating the reactions of global bond and stock markets to sovereign credit rating changes under macroeconomics and rating characteristics. The issues are investigated by measuring the pre- and post announcement of sovereign credit rating as well as contemporaneous responses of financial markets to rating changes.
We find rating agencies do provide financial markets with new tradable information and changes in ratings and outlook significantly affect both the bond and stock markets. Further, we find four specific reactions of bond markets different from stock markets. First, only bond market reacts positively and significantly when economic outlook is upgraded. Such a pattern is consistent with a reduction in default risk and little increase in economic growth. Second, the impact of outlook changes is larger than the impact of rating changes only for bond markets, suggesting investors most likely anticipate the later rating change from the outlook. Default risk reduction helps bonds, but not necessarily stocks. Third, downgraded rating assignments and economic outlooks occur only in bond markets during a market downturn. The abnormal return is negative every single day from 25 days before the announcement to 5 days after the announcement suggesting rating agencies announcements may exacerbate bear bond markets. This artifact of bond markets might be explained by an increase in default probability. This could also affect stocks, but may not be significant because stock returns are noisier and it is harder to find any significant effect. Fourth, the cumulative abnormal bond return during 45 days before 2 days after the announcement date is negatively significant when the rating is downgraded and it is negatively (positively) significant when the economic outlook is downgraded (upgraded). Fifth, controlled by selected country characteristics, upgrade rating events have no discernable impact on both bond and stock returns. Only downgrade rating events have. Sixth, a downgrade has a significant negative impact on bond and stock returns countries with less development and high inflation. A downgrade across class has a significant and negative impact on bond returns of countries with a relatively healthy economy as proxied by low inflation, high liquidity, and during non-crisis. Presumably, countries with a relatively strong economy surprise the market by having their ratings downgraded across class; thus, they receive a significant and negative impact on their bond returns. We also confirm the results by applying the level of rating change instead of dummy variables of downgrade vs. upgrade and by employing 2SLS with sovereign rating change level as an endogenous variable.
To conclude, we find market reacts to unexpected events and such reactions are different under country characteristics. Specifically, we extend the literature on this subject and provide important policy implications for investors' international asset allocation and for regulatory agents such as the Basel Committees depending on credit rating agencies such as Moody's and S&P's for their regulatory deliberations.
Future research might examine other ratings beyond sovereign debt rating. One could work with corporate ratings to investigate whether ratings convey different information for different groups of firms. For example, perhaps firms issuing ADRs with more transparent accounting standards and for which more information is available, would be less affected by rating changes than less transparent firms. Rating agencies also take exchange rate risk into consideration when they assign grade; therefore, whether these ratings differently impact countries and companies with different foreign exchange rate exposure or interest rate exposure is an interesting issue to explore.